Ascent Industries Co. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2018

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows at the respective year ends:



	2018			2017
Deferred income tax assets:
Sale leaseback deferred gain	$	1,310,850		$	1,382,270
Inventory valuation reserves	174,377			209,745
Allowance for doubtful accounts	35,955			7,944
Inventory capitalization	1,500,710			943,203
Environmental reserves	—			124,029
Warranty accrual	8,084			8,132
Deferred compensation	28,090			36,617
Accrued bonus	910,824			483,238
Accrued expenses	22,957			24,749
State net operating loss carryforwards	1,934,071			2,069,258
Equity security mark to market	622,189			3,248
Straight line lease	230,841			123,570
Other	507,997			352,520
Total deferred income tax assets	7,286,945			5,768,523
Valuation allowance	(1,765,993		)	(2,087,860		)
Total net deferred income tax assets	5,520,952			3,680,663
Deferred income tax liabilities:
Tax over book depreciation and amortization	5,120,533			3,971,816
Prepaid expenses	377,498			174,322
Interest rate swap	103,708			87,016
Other	172,201			83,419
Total deferred income tax liabilities	5,773,940			4,316,573
Deferred income taxes	$	(252,988	)	$	(635,910	)

Significant components of the provision for income taxes from continuing operations are as follows:



	2018			2017			2016
Current:
Federal	$	3,468,673		$	1,067,490		$	(980,495	)
State	290,459			106,832			190,230
Total current	3,759,132			1,174,322			(790,265		)
Deferred:
Federal	(107,879		)	(1,043,384		)	(1,329,302		)
State	(275,043		)	6,201			(78,433		)
Total deferred	(382,922		)	(1,037,183		)	(1,407,735		)
Total	$	3,376,210		$	137,139		$	(2,198,000	)

Tax benefit from discontinued operations amounted to $51,000 for the fiscal year ended December 31, 2016. The Company did not have any discontinued operations for 2018 and 2017.

The reconciliation of income tax computed at the U. S. federal statutory tax rates to income tax expense is:



	2018					2017					2016
	Amount			%		Amount			%		Amount			%
Tax at U.S. statutory rates	$	3,459,464		21.0	%	$	502,690		34.0	%	$	(3,125,382	)	34.0	%
State income taxes, net of federal tax benefit	268,924			1.6	%	65,546			4.4	%	(48,842		)	0.5	%
State valuation allowance	(314,505		)	(1.9	)%	8,498			0.6	%	95,961			(1.0	)%
Life insurance cash surrender value	—			—	%	—			—	%	503,700			(5.5	)%
Manufacturing exemption	—			—	%	(116,980		)	(7.9	)%	—			—	%
Stock option compensation	(39,401		)	(0.2	)%	226			—	%	45,929			(0.5	)%
Rate change effects	—			—	%	(380,961		)	(25.8	)%	—			—	%
Other, net	1,728			—	%	58,120			4.0	%	330,634			(3.6	)%
Total	$	3,376,210		20.5	%	$	137,139		9.3	%	$	(2,198,000	)	23.9	%

Income tax payments of $2,419,009, $2,576,515 and $991,888 were made in 2018, 2017 and 2016, respectively. The Company had state net operating loss carryforwards at the end of fiscal years 2018 and 2017 of $46,511,086 and $49,711,027, respectively. The majority of these losses will expire between the years of 2018 and 2037, while various losses are not subject to expiration. A valuation allowance has been set up against $41,742,152 of these state net operating loss carryforwards because it is not more likely than not that the losses will be realized in the foreseeable future. The portion of the valuation allowance for the state net operating loss carryforwards was $1,689,246 and $2,064,674 at December 31, 2018 and December 31, 2017, respectively. In addition, a $76,747 and $23,186 valuation allowance was established at December 31, 2018 and 2017 respectively, for other deferred tax assets. This resulted in a valuation allowance decrease of $321,867 all related to continuing operations.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company is no longer subject to U.S. federal examinations for years before 2014 or state income tax examinations for years before 2013.

The Company had no uncertain tax position activity during 2018 or 2017. The Company's continuing practice is to recognize interest and/or penalties related to income tax matters in the provision for income taxes. The Company had no accruals for uncertain tax positions including interest and penalties at the end of 2018.

On December 22, 2017, the Tax Cuts and Jobs Act (“The Tax Act”) was signed into law by the President of the United States, enacting significant changes to the Internal Revenue Code effective January 1, 2018. The Tax Act includes a number of provisions including, but not limited to, a permanent reduction of the U.S. corporate tax rate from 35 percent to 21 percent, eliminating the deduction for domestic production activities, limiting the tax deductibility of interest expense, accelerating the expensing of certain business assets and reducing the amount of executive pay that could qualify as a tax deduction. Many effects of The Tax Act are international in nature, such as the one-time transition tax, base erosion anti-abuse tax and the global intangible low-taxed income tax, and thus would not pertain to the Company as it has no international operations.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of The Tax Act. During the fourth quarter ended December 31, 2018 the Company completed the accounting of certain income tax effects upon filing of the U.S. corporate income tax return. As a result, the Company recorded an insignificant amount of income tax expense to complete its accounting for The Tax Act, allowed under SAB 118.